S&P downgrades Bank of India on weakening asset quality

Global rating agency Standard & Poor’s today downgraded Bank of India’s long-term issue ratings on weakening asset quality.

“We lowered the long-term issue ratings on Bank of India’s Basel II compliant hybrid notes (upper Tier 2 sub-ordinated and hybrid Tier 1 notes) to ‘B+’ from ‘BB’,” S&P said in a statement.

However, it had affirmed its ‘BBB-’ long-term and ‘A-3’ short-term issuer credit ratings on Bank of India.

“The outlook on the long-term rating is stable. We also affirmed our ‘BBB-’ long-term issue ratings on the outstanding senior unsecured notes of the India-based bank,” the statement said.

“We affirmed the ratings to reflect Bank of India’s sound franchise and business diversity and a ‘very high’ likelihood of government support,” it said.

The rating agency expects Bank of India’s credit costs to remain high because of continued pressure on asset quality, given the tough operating conditions for the corporate sector in India.

About 70 per cent of the bank’s loans are in the domestic market, and about 74 per cent of these loans are to the corporate and micro, small and mid-sized enterprise segments, it said.

The rising stress in these exposures has led to an increase in the bank’s consolidated gross non-performing loan ratio to 5.36 per cent as of March 31, 2015, from 3.14 per cent as of March 31, 2014, it added.

“In addition, Bank of India has sizeable exposure to the infrastructure and metal sectors, which we view as having high risk. These sectors have also come under stress in the current business cycle,” it said.

The bank’s ratio of standard restructured loans to total loans is about 5.3 per cent as of March 31, 2015, which may also contribute to the slippages, it added.

“We expect Bank of India’s earnings to remain weak over the next 12-18 months because of high credit costs and declining net interest margins,” it said.

The bank’s mediocre internal capital generation is unlikely to support its loan growth, it said, adding that it has relied on equity infusions and additional Tier 1 issuance to support its growth over the past three to four years.

Meanwhile, Bank of India shares today closed 3.50 per cent down at Rs 183.25 apiece on the BSE.